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 Richmans' Trade and Taxes Blog

The Corporate Income Tax Cut Is Unnecessary; Treat Corporations As Partnerships
Raymond Richman, 11/9/2017

Corporations are artificial entities and artificial entities bear none of the burden of income taxes; those who own them bear the burden of the income tax and gain from tax reductions. The burden of the corporate income tax is borne by the shareholders, and guess what? The top one percent of the richest Americans own forty percent of the stock of American corporations and the next nine percent own forty percent. The corporate income tax cut from 35% to 20% will reduce their burden 42%. That is why the U.S. stock markets have been booming since Trump’s election. But the purpose of income tax reform is not to make the rich richer; it is to lower taxes on the middle class and eliminate loopholes. So why are we giving the rich (and foreigners who own 15% of American corporate shares) such an enormous tax break?

The reasons given by its proponents is that the U.S. high rate causes American companies  to 1) invest in or move their headquarters and factories to lower tax countries, 2) cause U.S. multi-nationals to keep their foreign earnings abroad because to return them to the U.S. will subject them to the higher U.S. income tax rates, and 3) U.S. multi-nationals will use the high rates and low or non-existent American tariffs resulting from international trade agreements to produce their products abroad and to export them to the U.S. duty-free. These and many other evils of the corporate income tax can be corrected by a costless solution, namely, taxing corporate earnings under the personal income tax just as we tax partnership earnings. After all, the corporation is simply a limited liability company and most American partnerships and proprietorship have registered as limited liability companies (LLCs), and 4) stimulate economic growth. Under our proposal, the earnings of foreign subsidiaries would be subject to the personal income tax so there would be no incentive to keep earnings abroad.

The fact that the cut will cause a substantial loss of revenue, at least in the short-run, is the reason that Congress plans to disallow the deduction of some state and local taxes by the rich in the personal income tax.  

It is claimed that cutting the corporate income tax would stimulate the economy and reduce the loss of revenues in the long-run. We do not believe there is sufficient evidence to support this conclusion. The federal government budget has been in substantial deficit for a decade and our growth rate has averaged less the two percent. Why should we expect that making the rich richer than they already are would increase the growth rate?

Why do we need a corporate income tax at all when we have a personal income tax? Partnership earnings are taxed under the personal income tax and the corporation is simply a limited liability partnership. Since the corporate income tax was passed, States have permitted the registration of partnerships and even proprietorships as limited liability enterprises. The excuse for separate taxation of corporations no longer exists. If the corporate and personal income taxes were integrated corporations would withhold some fixed percentage, say 35%, of their earnings which would be credited to shareholders for personal income tax purposes. Government revenues would not be affected very much if at all.

Republicans propose to eliminate the estate tax which has been criticized for forcing the breakup of small farms and businesses in order to pay the tax. The estate tax has a $5 million exemption. How many family farms and small businesses are worth $5 million? The proposal to phase out the estate tax in five years. In the meantime, the exemption would be $10 million to protect “small” family farms and businesses! The existing estate tax yields very little revenue because millionaire and billionaires anticipate it and take steps to reduce the size of their estates. Many if not most of the large multi-million dollar estates are deliberately reduced by gifts to universities and non-profit institutions and newly-created foundations. And the wealthy enable family members to become joint owners of the precious assets they own, including farms and businesses.

So we propose to eliminate the corporate income tax entirely and tax corporate earnings as personal income as we already treat the earnings of partnerships. Under our plan, corporations would withhold 35%, the present corporate income tax rate, of corporate earnings which would be credited to shareholders in calculating their personal income tax liability. That was the treatment the British gave to corporate income under the Income and Property Tax Acts from the 10th century to World War II.

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Comment by M, 12/4/2017:

The current tax reform is purpose driven. The great stock market reflation since 2008 is complete. The Smart money needs suckers to buy in, so they can sell out. Cutting the income tax will (temporarily) buoy stock prices, while the smart money sell out.  Classic Pump (and) Dump.

A crash is coming to a stock market near you. Time frame (January- March 2018.)

Bonus, this Tax Reform will have wasted all of the available resources that could have either stabilized the economy or been directed toward meaningful tax reform (as described by this blog).

Tax increases of all stripes will be the order of the day, after the next stock market implosion. The Estate Tax will return. Count on it.

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  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

    Journal of Economic Literature:

  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

    Atlantic Economic Journal:

  • In Trading Away Our Future   Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]